04 Nov The CARES Act and Student Loan Repayment

The CARES Act and Student Loan Repayment

The provision in the Coronavirus Aid Relief and Economic Security (CARES) Act allows an employer to contribute up to $5,250 annually toward an employee’s student loans, and the payments would be excluded from the employee’s income. The $5,250 limit applies cumulatively to both the new student loan repayment benefit as well as other educational assistance, such as tuition reimbursement or money for books and materials. By utilizing such a program, both employers and employees will avoid federal payroll taxes on qualifying payments, and employees will save on federal income taxes that would otherwise apply.

Key Requirements

To take advantage of this benefit, employers who already maintain an educational assistance program will need to amend their program, and employers who do not already maintain such a program will need to adopt one. The following provides an overview of some of the key requirements of an educational assistance program that provides for student loan repayment assistance:

Written Plan

The program must be set forth in a written plan document. There are no specific requirements as to the form of the written plan document, but the document should fully describe the eligibility, benefits, and rules of operation and should be formally adopted by the employer.

Notice

Employers must provide reasonable notification of the availability and terms of the program to eligible employees. Often, the program or plan document is prepared to also serve as the notice that may be distributed to employees.

Eligibility

Except for certain owners, all employees may be eligible to participate in the program. For this exclusion, treat the following individuals as employees:

• A current employee
• A former employee who retired, left on disability, or was laid off
• A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control
• Yourself (if you are a sole proprietor)
• A partner who performs services for a partnership
• Employers, however, may limit eligibility in a variety of ways (e.g., employees with a certain title or employees in a certain location), but any eligibility restrictions must not discriminate in favour of highly compensated employees. Discrimination issues can be avoided by making all employees eligible or by excluding all highly compensated employees. For this exclusion, a highly compensated employee for 2020 is an employee who meets either of the following tests.
• The employee was a 5% owner at any time during the year or the preceding year.
• The employee received more than $125,000 in pay for the preceding year.  You can choose to ignore this bullet point if the employee wasn’t also in the top 20% of employees when ranked by pay for the preceding year.

Benefits

An employer may provide up to $5,250 in educational assistance to an employee each year under the program. Historically, such assistance has been limited to reimbursing employees for expenses, paying expenses on their behalf, or waiving expenses (if the employer is an educational institution) the employee incurs for education while employed. However, under the CARES Act, effective for payments made by employers from March 27, 2020, through December 31, 2020, educational assistance includes payments of principal or interest on a “qualified education loan,” as defined in Code Section 221(d)(1), incurred for the education of the employee. The payments may be made directly to lenders or as reimbursements to employees and are combined with any other payments under the program for purposes of applying the $5,250 maximum.

• For this purpose, a “qualified education loan” is a debt incurred by the employee solely to pay qualified higher education expenses incurred by the employee around the same time and during a time when the employee was an eligible student.
• Substantiation – Employers should require that employees receiving benefits under the program substantiate their expenses.
• No Cash in Lieu of Benefits – Employers cannot offer employees benefits under the program in lieu of a cash payment. In other words, employees cannot “opt-in” or “opt-out” of benefits.
• Claw-Back Provision – The program may require that an employee who receives benefits under the program and does not satisfy some subsequent condition, such as remaining employed for one year, repay the benefits. Such a provision, however, is not always enforceable under state law and can be difficult to enforce as a practical matter.